Why Another ‘Crypto Winter’ Is Test for Digital Money


The latest slump in digital assets has been gut-wrenching for those investors who bought in at the peak last year. Even crypto diehards, while still convinced that the world is on the verge of a blockchain-driven revolution in finance, were left shaken by the market rout. To those still keeping the faith, the “crypto winter” will be like the dotcom bust of the early 2000s – weeding out failing ventures to make room for more promising startups. Others wonder if spring will ever come.

1. What is a crypto winter?

It’s similar to a bear market in other assets. Stocks are in a bear market when a benchmark index falls by at least 20% over a period of at least two months. Crypto winters often feature dramatic declines, followed by long bouts of weak prices and low trading volumes. One slump that began in 2018 wiped as much as 88% off the market value of all crypto assets, according to tracker CoinMarketCap. This time around, they’ve fallen by as much as 68%.

2. What causes crypto winters?

In their short life, crypto markets have become synonymous with exuberant booms and panic-induced busts. Bitcoin lost around two-thirds of its value in 2014, driven partly by the failure of a major crypto exchange. In 2018, a regulatory crackdown on initial coin offerings led to the demise of thousands of newer cryptocurrencies, sending valuations plunging to earth again.

3. How did this one happen?

This time, forces beyond the world of crypto were partly responsible. When central banks loosened monetary policy in response to the coronavirus pandemic, investors piled into blockchain startups and digital assets. Later, when central banks began to reverse course, crypto assets slumped – exploding the idea that they enjoyed a similar status to gold as a refuge for investors in times of economic uncertainty.

The initial slump triggered the collapse of the TerraUSD stablecoin (a digital token designed to maintain a peg to the US dollar). That in turn led to the failure of hedge fund Three Arrows Capital, crypto broker Voyager Digital and crypto lender Celsius Network among others. Prices fell further in the following weeks as investors wondered how far the contagion might spread. Between Bitcoin’s November peak and late June, $2 trillion was wiped from the combined market value of crypto assets.

4. Why was it so brutal?

Even by the industry’s own volatile standards, it was a spectacular rout. Crypto was supposed to have come of age since the days when it was the obsession of a core of “true believers” and shunned by most investors. The implosion of TerraUSD, Celsius, and others was a shock for the pension and sovereign wealth fund managers – and millions of small investors – who embraced crypto in recent years, as well as for venture capitalists who had funneled tens of billions of dollars into crypto startups at astronomical valuations.

It turns out that the bull market of recent years was built on shaky foundations because many investors borrowed heavily to wager on digital coins and projects, often using another crypto as collateral.

5. What was the impact?

Critics see the slump as proof that these assets are still too risky to have a place in conventional investment portfolios. Even crypto cheerleader Elon Musk took a step back: His electric car company Tesla Inc. sold 75% of its Bitcoin holdings. More than six months after the winter began, crypto exchange volumes were still low and weak business activity was making it harder for crypto startups to raise capital.

Companies were laying off staff, including exchanges Gemini Trust and Coinbase Global Inc. and nonfungible token marketplace OpenSea. The harm done to both institutional and small investors has put governments under more pressure to drag crypto into the same orbit as traditional finance, with improved regulatory oversight to avoid more disasters.

6. What’s the outlook?

It’s too early to say if the turmoil is over. Meanwhile, some crypto startups with workable business plans are running out of cash. Many of the crypto miners who play a vital role in ordering transactions on blockchains – the digital ledgers that underpin crypto – are in distress as the value of the tokens they earn no longer covers their operating costs.

It’s now clear that crypto assets are as vulnerable to rising interest rates as other investments such as technology stocks. (The crypto slump mirrored a similar decline in the tech-heavy Nasdaq Composite Index.) This has given ammunition to critics who see crypto as a purely speculative investment.

Crypto has a history of bouncing back. Just as the last downturn led to the emergence of now powerful players such as exchange FTX, ventures that survive the current crypto winter will have fewer competitors and more space to mature and improve their offerings. The growing regulatory crackdown, while adding to the near-term uncertainty around crypto, could eventually make it a more respectable, stable asset class.

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